Health economics is a branch of economics concerned with issues related to scarcity in the allocation of health and health care. Broadly, health economists study the functioning of the health care system and the private and social causes of health-affecting behaviors such as smoking.
A seminal 1963 article by Kenneth Arrow, often credited with giving rise to the health economics as a discipline, drew conceptual distinctions between health and other goals.[1] Factors that distinguish health economics from other areas include extensive government intervention, intractable uncertainty in several dimensions, asymmetric information, and externalities.[2] Governments tend to regulate the health care industry heavily and also tend to be the largest payer within the market. Uncertainty is intrinsic to health, both in patient outcomes and financial concerns. The knowledge gap that exists between a physician and a patient creates a situation of distinct advantage for the physician, which is called asymmetric information. Externalities arise frequently when considering health and health care, notably in the context of infectious disease. For example, making an effort to avoid catching a cold, or practicing safer sex, affects people other than the decision maker.
The scope of health economics is neatly encapsulated by Alan Williams’ “plumbing diagram” dividing the discipline into eight distinct topics:
- What influences health? (other than health care)
- What is health and what is its value
- The demand for health care
- The supply of health care
- Micro-economic evaluation at treatment level
- Market equilibrium
- Evaluation at whole system level; and,
- Planning, budgeting and monitoring mechanisms.
—Wikipedia—